The graph below depicts an economy where an increase in aggregate demand has caused inflation. Assume the government decides to conduct fiscal policy by decreasing government purchases to restore full-employment GDP. Price Level 180 160 140 120 100 80 60 40 20 0 Fiscal Policy LRAS AS * AD AD, 100 200 300 400 500 600 700 800 900 1000

ENGR.ECONOMIC ANALYSIS
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Chapter1: Making Economics Decisions
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The graph below depicts an economy where an increase in aggregate demand has caused inflation. Assume the government decides
to conduct fiscal policy by decreasing government purchases to restore full-employment GDP.
Price Level
180
160
140
120
100
80
60
40
20
0
Fiscal Policy
LRAS
AS
AD
AD,
100 200 300 400 500 600 700 800 900 1000
Real GDP (billions of dollars)
Instructions: Enter your answer as a whole number. If you are entering a negative number include a minus sign.
a. How much does aggregate demand need to change to restore the economy to its long-run equilibrium?
$ (200) billion
b. If the MPC is 0.75, how much does government purchases need to change to shift aggregate demand by the amount you found in
part a?
$ (50) → billion
Suppose instead that the MPC is 0.6.
c. How much does aggregate demand and government purchases need to change to restore the economy to its long-run equilibrium?
Aggregate demand needs to change by $ (200) billion and government purchases need to change by $
billion.
Transcribed Image Text:The graph below depicts an economy where an increase in aggregate demand has caused inflation. Assume the government decides to conduct fiscal policy by decreasing government purchases to restore full-employment GDP. Price Level 180 160 140 120 100 80 60 40 20 0 Fiscal Policy LRAS AS AD AD, 100 200 300 400 500 600 700 800 900 1000 Real GDP (billions of dollars) Instructions: Enter your answer as a whole number. If you are entering a negative number include a minus sign. a. How much does aggregate demand need to change to restore the economy to its long-run equilibrium? $ (200) billion b. If the MPC is 0.75, how much does government purchases need to change to shift aggregate demand by the amount you found in part a? $ (50) → billion Suppose instead that the MPC is 0.6. c. How much does aggregate demand and government purchases need to change to restore the economy to its long-run equilibrium? Aggregate demand needs to change by $ (200) billion and government purchases need to change by $ billion.
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